How to safely cross the wholesale/retail border

Financial advisers need a strong process to delineate between wholesale and retail clients, according to Barry Read, head of compliance firm, Independent Development Solutions (IDS).

Read told the Heathcote Investment Partners ‘Meet the managers’ roadshow in Wellington last week that designating clients as ‘wholesale’ could help advisers avoid many of the Financial Advisers Act (FAA) obligations.

However, Read warned advisers to be careful about which clients they labeled wholesale and how they managed the definition process.

He said advisers should determine whether clients are retail or wholesale at the engagement stage of the advice process with four questions in particular providing clues:

What are the objectives of the investment?

Which person or entity is the advice directed at?

What percentage of the client’s total investment assets are involved?

Do they require an investment planning service?

Read said if the clients met one of the legal definitions of wholesale and were clear about their investment objectives, then a wholesale service could apply.

“But if they want an investment planning service that’s an indicator you could treat them as retail,” he said.

However, if wholesale clients want to opt-in to a retail service then they must do so in writing, Read said.

Wholesale investors are defined under both the FAA and the Financial Markets Conduct Act (FMC) offering advisers several methods to classify clients.

“The definition is not that you can charge retail clients the most and have to offer wholesale clients a discount,” Read said.

He said clients are wholesale if:

The have investments in financial products valued at $1 million or more;

The individual or entity has net assets or turnover of $1 million plus over the last two accounting periods;

They are an investment business or considered ‘large’ (over $5 million in assets); or,

They elect to be an ‘eligible’ investor – typically in relation to particular products including wholesale funds and discretionary investment management services (DIMS).

He said the rules create some anomalies where clients with substantial assets and little knowledge could lose many of the protections offered to retail investors.

However, from an adviser’s perspective dealing with wholesale clients offers compelling benefits.

According to Read, advisers don’t have to provide disclosure documents to wholesale clients while many of the Code of Conduct obligations also go out the window.

For example, he said advisers can borrow money from wholesale clients while they don’t have to carry out product suitability tests or even provide advice in writing.

At the same time, wholesale clients miss out on most of the complaints’ avenues open to retail investors.

“Retail clients can complain to the FMA, your own complaints body, your industry organisation and the courts,” Read said. “That’s four different ways retail clients can go after you.”

But while the wholesale rules don’t require advisers to follow retail disclosure and communication processes, Read said responsible advisers would likely do so anyway.

He said the FAA review could also offer some respite for authorised financial advisers (AFAs).

“When the July [FAA] options paper comes out I think AFAs will be pleasantly surprised,” Read told the Heathcote roadshow crowd. “The coming changes will benefit AFAs – the regulators are looking at ways to make it easier to give advice.”